Analysis: Va. looks to user fee-alternatives for highway funding

Thursday, February 21, 2013

Virginia Gov. Bob McDonnell’s controversial proposal to scrap the state gas tax in favor of a dedicated hike in the sales tax has the legislature on the verge of passing a transportation funding bill for the first time in more than a dozen years.
Reports from the state capitol in Richmond Wednesday indicated both House and Senate negotiators had agreed on a compromise that involved replacing the gas tax with a 3.5 percent tax on wholesale gasoline, raising the sales tax 0.3 percent to 5.3 percent, levying a $100 fee on hybrid cars and shifting about $200 million a year in sales taxes to highway use in five years. McDonnell has signaled his willingness to accept modifications as long as they raised similar amounts of money and didn’t rely completely on the gas tax.
McDonnell’s proposal has generated widespread attention as states across the nation, as well as the federal government, grapple with how to repair and upgrade deteriorating highway and transit systems in the face of declining revenue streams. And it raises fundamental questions about the merits of the current user-pay approach that underpins the gas tax at the federal and state level.
Experts at a panel discussion in Arlington, Va., last Thursday, organized by the Eno Center for Transportation and Bipartisan Policy Center, praised McDonnell for having the political courage to tackle a hot-button issue in a way that caused legislators and others to make substantive counter proposals after years of partisan gridlock centered on whether more general funds should be diverted from education, healthcare and public safety to transportation. They disagreed, however, with ending user fees and questioned whether the money raised was sufficient to modernize the surface transportation system.
“This proposal is nowhere near what is needed by Virginia to meet future surface transportation needs,” including commuter rail and transit, Jack Schenendorf, a transportation attorney affiliated with Covington & Burling and former chief of staff to the House Transportation and Infrastructure Committee, said. “You’re going to need much bigger increases in sales tax in the future to actually close the gap.”
The need to fix deteriorating highway conditions and address bottlenecks so travelers and freight can experience efficient and reliable trips has outpaced the ability of states like Virginia to pay for improvements, raising concerns among business leaders and economic development officials that congestion will become a drag on economic growth and make it more difficult for U.S. companies to keep costs and delivery times low when competing for business overseas.

McDonnell

McDonnell, a Republican, last month called for eliminating the 17.5 cent-per-gallon gas tax that has been in place since 1986 and replacing it with a 0.8 percent increase in the state’s sales tax dedicated to transportation, saying it would bring in more than $3.1 billion in transportation funding during the next five years. Truckers would continue to pay the tax on diesel fuel because trucks cause much more wear and tear on highways than cars, and hybrid vehicles would be assessed a $100 fee because they don’t contribute to the federal gas tax that makes up the bulk of highway and transit aid to states from the U.S. Department of Transportation, according to administration officials. The plan also seeks to allocate additional general fund money to transportation by increasing the 0.5 percent of the sales tax funneled to transportation by 0.25 percent. And it raises vehicle registration fees by $15, with the money targeted to intercity passenger rail and transit.
The conservative-dominated House of Delegates passed a bill that incorporated most of McDonnell’s ideas. The Senate voted to add 5 cents to the gas tax, with future increases tied to the cost of road construction, and create a 1 percent sales tax on wholesale gasoline, while giving localities the option to levy a 1 percent local sales tax to raise $700 million for transportation. Both plans removed the $100 alternative vehicle fee.
Several states use sales taxes to augment their gas tax revenues, but none has done away with the gas tax. In Missouri, a bill was recently introduced in the state legislator for a 1-cent sales tax for 10 years to pay for transportation needs.
Dwindling gas tax receipts and a state law that requires dedicated transportation funds to be spent first on maintenance, at the expense of new construction, forced the governor to take a different funding approach to plug the shortfall, officials said.
In Virginia, money from transportation fees goes into the Commonwealth Transportation Fund, but the gas tax only represents about a third of the pot. The balance comes from recordation of deeds, car rental tax, taxes on vehicle sales, and 0.5 percent of the sale tax that is already earmarked for transportation. Eighty-five percent of gas tax receipts go to the Highway Operations and Maintenance account to pay for paving and other repairs, while the remaining fees go into the Transportation Trust Fund, a capital account that pays for new roads, mass transit, aviation and even projects at the Port of Virginia.
Transportation officials for years have understood that the gas tax is not sustainable as a long-term source of funding for infrastructure. The continued popularity of alternative fuel vehicles, ever-rising fuel standards for automobile fleets, a slight dip in driving activity due to the recession, and inflation have eroded the amount of revenue collected by governments and their buying power.
A dollar today is worth 45 cents in constant terms since the last time the gas tax was raised in Virginia 26 years ago, Virginia Transportation Secretary Sean Connaughton said at the Eno event.
“We have statistics that show we have more cars being driven in the state and we have more vehicle miles traveled, yet our gas tax revenues are completely flat,” he said. Statewide revenues increased 19 percent in 2012, he said, but gas tax revenue only grew 0.5 percent compared to 4.6 percent for revenue generated by sales taxes. And in January, gas tax receipts fell 12.4 percent. Virginia would have to double the gas tax to make up for inflation over the past 25 years, he added.
Demographic trends - the migration of young adults toward city centers or close-in suburbs where they don’t need to use an automobile and an aging population with fewer people willing or able to drive, will reduce the number of trips taken by cars and cause planners to rethink transportation priorities, Frank Shafroth, director of the Center of State and Local Leadership at George Mason University, predicted.
By 2015, the balance in the federal Highway Trust Fund used to reimburse states for a large portion of their highway projects will drop to zero without some sort of revenue increase, according to a recent estimate by the Congressional Budget Office.
Under Virginia law, any money coming into the transportation system goes first to debt service, then maintenance. New construction is the last priority and if there isn’t enough money to meet maintenance needs officials have to raid the construction account, which has happened regularly since early last decade. This fiscal year the Commonwealth Transportation Board will have to move over $364 million from the capital account to the operations account in the current fiscal year, and by fiscal year 2019 the transfer amount will equal $500 million unless new funding is found - wiping out any money for new highway capacity, according to administration figures. Since 2002, the state has shifted $3.3 billion worth of construction money to the maintenance account, Connaughton said.
“Maintenance is impacting our ability to grow our system,” he said.
The McDonnell plan would be revenue neutral in the first year because of the elimination of the gas tax, but would generate $844 million in new funding per year by fiscal year 2018, officials said. Administration projections are based on expectations that sales tax revenue will grow at a rate of 5 percent to 6 percent each year versus a gas tax with stagnant growth.
By eliminating the maintenance crossover, McDonnell said his plan provides $1.8 billion for highway construction during the next five years.
Money from the 0.25 percent hike in the sales tax would go strictly to maintenance, except for the first three years when the state has committed $300 million for its share of the subway line extension to Dulles Airport.
Shafroth said moving to the sales tax is like moving from one “dinosaur tax” to another, because states have not figured out yet how to uniformly tax Internet sales and will continue to lose revenue as more services get digitized.
Schenendorf argued it was a mistake to move away from user financing entirely. A transportation policy and revenue commission he co-chaired recommended to Congress in 2008 that the gas tax should be increased 25 cents to 40 cents over five years, and indexed to inflation or fuel standards for 10 to 15 years while the federal government transitions to a more viable source of revenue. A sales tax could be part of the solution, it said.
The Obama administration and lawmakers in Congress have rejected attempts to raise the gasoline tax for fear of upsetting the electorate even as the federal Highway Trust Fund fell short of meeting obligations to states for committed projects and was bolstered by general fund transfers.
Repealing the gas tax is politically attractive, but “what’s going to happen three years from now when they say we need more money for transportation and try to raise the sales tax by some significant amount? It’s going to be every bit as politically difficult to do that as it is to raise the gas tax,” Schenendorf said.
“In fact, you can argue it is going to be a harder sell because you’re not taxing the users who benefit, you’re taxing everyone and you’re going to have more resistance to raising the sales tax and trying to dedicate it to transportation.
“And transportation is not going to be able to win that battle” for general funds against competing interests like education, healthcare and public safety,” he said.
McDonnell has said he considers transportation a core function of government.
Eliminating the gas tax is “a little bit of a gimmick” and might be rooted in Republican Party politics, Eno Center President Joshua Schank said in a January interview.
Political pundits have widely speculated that McDonnell is eyeing a presidential run. McDonnell could claim he cut taxes, a popular Republican position, even as he raised them on the other end, Schank said. McDonnell’s plan was also inconsistent and unfair because it eliminated user fees for automobiles, but retained them for trucks and hybrids. And the sales tax is regressive compared to the gas tax, unless more of it is directed to mass transit, he added.
“If you use the sales tax for mostly highways they way you use the gas that’s very regressive because a lot of the people paying the sales tax are not using it, and are are not seeing the benefits,” Schank said.
But Shin-Pei Tsay, director of cities and transportation in the Energy and Climate Program at the Carnegie Endowment for International Peace, and Connaughton said the user-fee concept is an illusion because nobody pays the true cost of using a vehicle.
“If gas really reflected the true cost born by society for driving it (the tax) should be around $1.23 per gallon,” Tsay said. The current level is too low to change driving behavior or be a true user fee, she added.
The Carnegie Endowment unsuccessfully pressed Congress in the runup to last year’s transportation reauthorization bill for a variable gas tax and a fee on the price of a barrel of oil because it believes energy producers are not contributing their share to a transportation system that greatly benefits them.
“We need to pull the scab off of the gas tax as a user fee,” Connaughton said, noting too that gas tax money also gets diverted to support transit, build bike paths and beautify roadways. And, a significant amount of money from less affluent areas of the state goes to support projects in wealthy Northern Virginia, which means users don't get a direct payback for their fees, he added.
A user fee protected in a trust fund is necessary to provide assurance to state officials and contractors that money will be available in future years to pay for giant, multi-year projects, especially with more funding devolving to the states, and to pay bondholders holding long-term construction debt, Schenendorf and Shafroth insisted. - Eric Kulisch